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Answer: b) Her net (i.e., underlying plus hedge) position deteriorates due to the unexpected strengthening of the hedge
For a **farmer who will sell wheat in the future**, the hedge is typically a **short futures hedge**. The farmer expected the basis to move from **-0.30 to 0.00**. Instead, it moved to **+0.10**, which means the basis **strengthened more than expected**. For a short hedger, an unexpected strengthening of the basis generally means the hedge performs **worse than expected**, so the farmer’s **net position deteriorates**. **Correct answer: B**
Author: Manit Arora
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Q-152.2 At the beginning of the year, a farmer makes plans to sell wheat in the month of September. She uses September wheat futures contracts to hedge when the basis (at the beginning of the year) is minus (-) $0.30. Her hedge anticipates a convergence of the basis to zero in September. Unexpectedly, due to delivery frictions, the basis in September is positive (+) $0.10. What is the impact on the farmer’s net position, i.e., underlying plus hedge?
A
a) Her net position improves due to the unexpected strengthening of the hedge
B
b) Her net (i.e., underlying plus hedge) position deteriorates due to the unexpected strengthening of the hedge
C
c) Her net position is unchanged due to the hedge
D
d) We cannot know without the future spot price
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